Bill Lipschutz: Bill Lipschutz’s tips on how to become a successful forex trader


A Google search for the top forex traders in the world will show Bill Lipschutz in the top 10. The co-founder and Director of Portfolio Management for Hathersage Capital Management, Lipschutz had also worked for Solomon Brothers as Global Head of Foreign Exchange from 1981 to 1990. He was responsible for the development of the exchange-traded and over-the-counter foreign exchange option markets. He has held a number of elected and appointed positions in the foreign exchange industry.

Born in Farmingdale, New York, Lipschutz began his trading career while attending Cornell University. He has a bachelor’s degree in fine arts and completed his MBA in finance in 1982. Lipschutz’s education background has undoubtedly contributed to his success in the forex market.

He became interested in stocks after inheriting $12,000 worth of stocks when his grandmother died. Eventually, Lipschutz managed to turn his inheritance into $250,000, after hours of stock market research. He has had his share of ups and downs in his investing career; he once lost his entire portfolio balance on a single bad trading decision because he failed to use an appropriate risk-management strategy. He could have walked away from trading after this major setback. But it fuelled his interest in trading, and he decided to learn from his mistakes. In 1995, he formed his own company, Hathersage Capital Management.

Lipschutz has featured in books such as The New Market Wizards: Conversations with America’s Top Traders, by Jack D. Schwager, 1992 and The Mind of a Trader: Lessons in Trading Strategy From The World’s Leading Traders, by Alpesh B. Patel, 1998. He was inducted into the Trader Monthly Hall of Fame in October 2006.

Trading Strategy

Lipschutz says the primary focus point of investors while trading should be the risk-reward ratio. He always focuses on a 3 dollar return for 1 dollar risk. Also, according to Lipschutz, it is important to understand the difference between a winning trade and losing trade, including the timing of trades, stop loss-take profit set, and the size of trades.

“If you make any mistake in calculating the trading size and winning or losing trade, you may have to pay the price with your trading capital. However, it is also essential to understand the big picture of the market, which is a crucial element of price action trading,” he said during an interview with Jack D Schwager.

Investors should focus on understanding the market well, whether they trade based on technical analysis or fundamental analysis. Many traders do not want to focus on fundamentals, he says, but it is critical to understand at least the essential function of fundamental analysis as it provides the logic and reason for market moves. “It is necessary to understand what the market is thinking and how to manage risks with the sentiment,” he said.

Many traders come into the market and consider it as a money-making machine, which is not a wise thing to do, he says.

Lipschutz has revealed many important tips for successful forex trading in his interview with Jack D. Schwager in “The New Market Wizards: Conversations with America’s Top Traders.” Let’s look at some of these tips.

Pay attention to risk-reward ratio

Investors need to pay attention to the risk-to-reward ratio, he says. They should be looking at positions where the potential profit is at least three times the amount they are risking on the trade. For short-term trades, Lipschutz looks for a 3-to-1 multiple of upside to downside. For more complicated trades where investors are risking significant capital, he says the ratio should be closer to 5 to 1 as a minimum. “A good rule of thumb for a short-term trade – 48 hours or less – is a ratio of three to one. For the longer-term trades, especially when multiple leg option structures are involved and some capital may have to be employed, I look for a profit-to-loss ratio of at least five to one,” says the co-founder of Hathersage Capital.

Pay attention to details

Lipschutz stresses on the importance of structuring each trade to maximise the chances of success. Even if investors have a winning prospect, it’s easy to lose money if they don’t get the details right. “If your timing is slightly off, you could lose. You have to structure your trade in a manner that increases your probability, your upside, and decreases your downside. Getting your timing slightly wrong can lose you huge amounts of money. So it’s important to get the deal execution perfect. Do everything you can to increase your chance of winning, while limiting the risk in each trade,” he says.

Understand the market

Lipschutz places importance on sentiment. Whether they are pure technical traders or have a different approach, he says, it is a mistake to ignore market perception. “It doesn’t matter if that perception is based on the Aztec calendar. If traders think that something is going to happen based on their charts, then something is going to happen just because of the momentum in the market. Unless you understand this, you’re going to end up compromising your trading positions,” he adds.

Work hard

The co-founder of Hathersage Capital says the best traders are highly intelligent and willing to put in what it takes to be successful. Just being a genius is not enough to be successful in forex trading. “Truly successful traders look at money as simply a way of keeping score and get deep satisfaction out of the trading itself,” he says.

Be totally focused

Lipschutz explains that a truly successful trader has to be totally focused and involved in trading. Money shouldn’t be the only reason for an investor to get into the trading profession. “Most of the top traders have a child-like fascination with the game. Whether it’s the psychological elements of the game, the technical elements of the game, whether it’s the nameless, faceless aspect of a market, or them as single individuals against the market, or beating their brains against everyone else’s. There’s a kind of almost insane focus you must have to achieve trading excellence,” he says.

The price of phenomenal success is something not many investors are prepared to pay. For those with insane focus, he adds, there is virtually no price to pay as they love what they are doing.

Options are not appropriate as an insurance policy

Lipschutz says using options as an insurance policy is probably not appropriate for the professional trader. It may be appropriate in market sectors where there is not much liquidity or if price movements are often discontinuous. “A professional trader who is ‘close to the market’ at all times that he is carrying an open position will be able to cut the position and get out if it goes against him. Only in the infrequent case of a professional who carries extremely large positions which alter these price characteristics of the market would I favour the use of options as insurance,” he says.

Feel the pain of losses

The best traders feel the pain of a loss and they are never numb to it because if they are, it’s game over for them, explains the veteran forex market player. Lipschutz explains that the moment investors become numb to a loss, they start to gamble and the money in their account gets thrown at the market in a desperate attempt to gain back what they’ve lost. “When you go through a losing streak, all the self-doubts come out and you do get very reluctant to pull the trigger. There is nothing you can do that is right. Just every single thing you do is wrong. That is something you just have to learn to control. You really have to learn how to control that fear. You have to feel the pain of a bad trade, or a wrong trade. If you don’t, and are numb to it, then it’s over,” he adds.

Lipschutz is a good example of how determination can pay off when it comes to trading. Even if investors get off to a rough start, it doesn’t mean that they can’t be one of the best traders out there someday.

(Disclaimer: This article is based on Bill Lipschutz’s interview with Jack Schwager in the Market Wizards books series)

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